Indian IT Faces a Tough 2013

Infosys Ltd., India’s second-largest software exporter, slashed its revenue growth forecast for this fiscal year to at least 5% from the 8%-10% set in April.

India’s software exporters are bracing for yet another tough year, with economic uncertainty in their main outsourcing markets of the U.S. and Europe refusing to go away.

The U.S. may have staved off a crisis by sealing a deal to avert the so-called fiscal cliff, but the risks of a potential debt default and future spending cuts remain.

“We are likely to see some economic tightening in the U.S. due to higher taxes and spending cuts, which will result in tightening of budgets for many IT departments, especially in the public sector,” says Phil Fersht, chief executive of HfS Research, a U.S.-based firm that offers research and analysis services.

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This is adding to fears that 2012′s challenges for Indian software companies will roll into 2013. Last year began well for India’s outsourcing companies, with most sounding optimistic about their growth prospects. But as the year progressed, several companies cut their outlooks because of the economic problems in the U.S. and Europe, currency volatility, and policy paralysis in India.

The India National Association of Software and Services Companies — an industry group — has trimmed its export growth forecast for this fiscal year through March to 9%-12% from 11%-14%. India’s top two outsourcing companies scaled back their financial outlooks as well, citing shrinking technology spending.

Infosys Ltd., India’s second-largest software exporter, slashed its revenue growth forecast for this fiscal year to at least 5% from the 8%-10% set in April. Cognizant Technology Solutions Corp., a Nasdaq-listed software exporter with more than three-quarters of its employees based in India, has cut its revenue growth target to at least 20% from the 23% set in February. Initial indications from the company suggest a modest 16% revenue growth in 2013.

Peter Schumacher, president and chief executive of Germany-based management consulting firm Value Leadership Group Inc., says the demand environment in 2013 will likely “remain tense,” especially during the first six months of the year.

“The demand for IT services in the Nordics, Europe’s best-performing region, has deteriorated notably following the summer,” he said. “Without more clarity and certainty on the political roadmap toward economic reform [in the U.S. and Europe], any recovery is likely to remain tepid as companies hold back technology spending and remain cautious.”

Frederic Giron, vice president and principal analyst at U.S.-based Forrester Research Inc., agreed that technology spending in the U.S. and Europe will remain slow in 2013, as it was in 2012.

For Indian service providers, an additional headwind could be a likely increase in the value of the rupee against the U.S. dollar. Most outsourcing companies convert all their foreign revenue first into dollars and then into rupees. A strong local currency squeezes revenue when converting overseas takings into rupees.

Mr. Giron expects the Indian rupee, which fell sharply in 2012, “to stabilize and even rise a bit” against the dollar in 2013.

Another drag is a slowdown in the financial services sector. Last month, Mumbai-based brokerage IIFL Capital said there are requests for temporary suspension of work outsourced to Indian software companies from financial services clients like American Express Co.Bank of America Corp. and Citigroup Inc. Executives at Amex and BofA weren’t immediately available for comment. A spokeswoman for Citigroup declined to comment.

At a recent analysts’ conference, Infosys said spending in the financial sector is likely to remain under pressure in 2013.

But some analysts say a slowdown may actually prompt businesses to spend more on technology. HfS’ Mr. Fersht predicts an increase in the number of IT deals going to Indian firms from U.S. businesses seeking to reduce IT costs.

“There is plenty of future IT work that can be moved to India,” he says. “A major economic downturn could well accelerate the adoption.”

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